aki 03 aki fundamentals shorttemcosts

7/29/2019 AKI 03 AKI Fundamentals ShortTemCosts

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COST ANALYSIS

for SHORT-TERM FS

Budi Hartono


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Engineering Costs Analysis

1. Decision-making setting

Short Run

At least one factor of production is fixed

A few months to a few years

Present Economy Studies or Current Cost Analysis

Long run

Time period of sufficient length to alter all factors of production

Investment analysis involving time value of money

2. Contribution to cash outflow

Non-recurring costs

Initial Costs

Disposal

Recurring

Operating

Maintenance

3Budi Hartono - JTMI UGM


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Short Run: Relevant Costs

Fixed Cost (FC)

constant regardless of level of output

Rental of facilities; Cost of machinery

Variable Cost (VC)

Vary with level of output

Materials; sub-contracting; labor

Total Cost = Total Fixed Cost + Total Variable

Cost4Budi Hartono - JTMI UGM

Short-run = short term = current cost analysis


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Example: Determining Relevant Costs for Taxi Driver

1.) From statistics on 2003, an average trip by a passenger is about 8 km2.) Assumptions:

Fuel Efficiency (litre/km) = 0.1 Average Speed (km/h) = 40

Cost of Diesel ($/litre) = $0.50 Drivers Time Cost ($/h) =$12



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Current Cost Analysis

Explore options to primarily minimize the average

total costs

Minimize variable costs

In short term, the fixed costs are fixed

Increase production units

Problem Scope

Typically involve choice among alternative designs,

materials or methods

Problem Structure

Time is not a significant economic factor



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Types of Current Cost Analysis

(Present Economy Studies)Type 1

No investment in capital and only out of pocket

expenses are involved

Type 2

Capital investments are irrelevant or treated as

variable costs

Investments utilized exclusively for the decision

Different processes choice that use existing capital



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Example of Type 1: Operating Speed of a Planer

1. Two speeds that the planer can operate at

2. Faster speed, more output, higher cost

3. Variable Cost:

- Blades

- Sharpening

- Downtime

4. Fixed Cost:

- Machine

- Building5. Fixed cost ?

Which speed should the planer be operated

at given that there is unlimited demand?



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Example 1 - Data



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Solution



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Solution (2)



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Solution (3)

Conclusion: Run the planer at ___________________________



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Example Type 1: Modification - Single Job of

6,000 board-foot

1. Choice for a single job

2. Minimize expense for job

3. Assume no cost sharing with other jobs

Assumption: No cost sharing with other jobs. 16Budi Hartono - JTMI UGM


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Example Type 1: Modification - Single Job of 6,000

board-foot



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Prototypical Type 1 - Current Cost Study

Choice of operational parameters (as in this example)

Choice of vendors for short term contracts

Choice of inputs (such as materials) without change

in machinery



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Example of Type 2: New Method of Manufacture

(Capital cost not compounded)

An order for 3 million pieces of machine parts.

1. Choice of Midway Option available only after 1.5m units are made.

2. Consider the cost for remaining 1.5m units using the two options



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Example of Type 2: Solution

1. Choice of Midway Option available only after 1.5m units are made.

2. Consider the cost for remaining 1.5m units using the two options



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Type 2 Example: Lessons

1. The $500,000 initial investment is not relevant to theconsideration. No cash flow impact at midway or beyond. (Thiseconomic concept is different from accounting concept).2. The $100,000 fixed cost is spread over the 1.5 million units. If the

number of units is smaller, the answer may change. 21Budi Hartono - JTMI UGM


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Type 2 Example: Volume when choice is switched


When volume is 400,000 instead of 1.5m


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Example of Type 2: Fixed Costs Involved

Not Relevant

1. A manufacturer makes parts for customers in batches of different sizes.

2. This manufacturer currently owns two machines, an engine lathe and a

turret lathe, of different characteristics that can be used to fulfil any

customers orders.

3. Since the two machines already belongs to the company, this impliesthat cashflow associated with the machines are in the past.

4. Hence, the capital investment of the two machines can be ignored.

5. The only relevant costs are the variable costs: labor, material, tooling,

operations

6. What is the most economical machine to use for different size of

customer orders?

Budi Hartono - JTMI UGM 23


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Example Type 2: Fixed Costs Involved Not Relevant



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Example Type 2 : Solution


If 25 units required


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Example Type 2 Solution: Batch Size Vs

Cost on Each Machine



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Prototypical Type 2 Current Cost Study

There is no other alternative uses for an existing asset in place

Differential first cost among alternatives does not create

disproportionate cashflows downstream

(our first type 2 example)

Alternative workflow path through existing equipment (our

second type 2 example)

Product mix decision utilizing existing equipment



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Comparison of Types 1 and 2 Current

Cost Studies



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Sunk Costs

Money spent in past

Price of car, stock price, prices of assets

Reflected in book costs (historical prices)

Purchase of Boeing 777 = $168m Accumulated Depreciation = $70m (5 year old plane)

Book Cost = $98m

Irrelevant to engineering economic analysis



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Example of Sunk Cost and Relevant Cost

Price of car = $114,000 (purchased 5 years ago)

Price of similar car = $94,000

Book value of car = $66,000

Loan outstanding on the car = $58,000

Trade-in value of car = $49,000 Cash value of car = $47,825

Scrap Value of car = $47,000

Your wish to get an advisor to help you with financial planning as you feel

that you are living beyond your means. In listing the value of your assets,

what value should you put on the car?



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Deceiving effects of including sunk cost

You have foolishly promise to pay $5,000

for a rosewood dining room table. You have

already paid 50% of the purchase price that

is non-refundable when you discovered that

the actual price is only $4,000.

You know from previous experience that

you can sell the piece on e-bay for $3,500.

However, you tell yourself that you are not

going to be silly and pay a total of $5,000

for a piece of furniture that is worth $4,000

to sell it on e-bay for $3,500. So you refuse

to pay the remainder of the price andforfeit the dining room table.

Budi Hartono - JTMI UGM 31Now, who is the silly one?


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Some fallacy of sunk costs

Keeping the business venture alive because you have so much invested in it.

Finishing the large pizza beyond the point of being full.

Sitting through a long, boring play because the tickets cost you $60 each.

Holding a poorly performing stock in the hope of getting your money back.

Resisting change because of the large investment in the present system, e.g.,staying with copper-wire technology in a fiber optic world.

Staying in a field of study or profession because of your tremendous

investment to date

(Source: Dan Seligman, Forbes, August 24, 1998, p. 62)


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Breakeven Analysis

An analysis to identify the quantity of units

sold or the revenue required to meet the

total cost of running the business

Breakeven Point: Level of business activity

at which total revenue= total cost

Failure to breakeven over the long term is arecipe for bankruptcy



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CHICKEN RICE MAK CIK


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BEP?


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What is the difference?



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Breakeven Analysis When Price-Volume Relationship Exists

P = a bQ (linear form) (1)

where,

P = Price,

Q = Quantity Demanded (Volume);

0 Q a/b; a > 0, b> 0

Profit = Total Revenue Total Cost (2)

= P*Q (FC + VC*Q)

= (a b.Q)*Q (FC + VC*Q)

= -b.Q2 + (a-VC).Q FC

where,

FC = Fixed Cost;

VC = Variable Cost per unit



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PR: Decision to advertise

Assume that the duck stall thinks of inviting a

media star to endorse the product.

This will cost the stall an additional $5,000 per

month that the advertisement is running.

How many additional servings must they sell

to make it worth the effort?



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PR: Breakeven Analysis When Price-Volume

Relationship Exists

1. You are considering the purchase of a machine and renting

factory space to make an electronic timing switch for

consumer and commercial products.

2. Before making the decision, you want to make sure that it has

a chance of being profitable.

3. So you decide to carry out a breakeven analysis

4. The data for the investment is given below.



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Pertanyaan:

1. Gambarkan grafik harga (P) terhadap volume (Q)

2. Hitunglah volume-volume penjualan saat break-

even terjadi3. Hitunglah volume penjualan saat profit maksimum

4. Gambarkan grafik profit vs. penjualan, dan

tunjukkan titik-titik yang terkait dengan pertanyaan(2) dan (3)



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Summary

What we have learned?

AKI jangka pendek vs. AKI jangka panjang?

aki 03 aki fundamentals shorttemcosts

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